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Lending Club

Lending Club is an online financial community that brings together creditworthy borrowers and savvy investors so that both can benefit financially. It replaced the high cost and complexity of bank lending with a faster, smarter way to borrow and invest.

Lending club enables borrowers to create loan listings on its website by supplying details about themselves and the loans that they would like to request. All loans are unsecured personal loans and can be between $1,000 – $35,000. On the basis of borrower’s credit score, credit history, desired loan amount and the borrower’s debt-to-income ratio, Lending Club determines whether the borrower is credit worthy and assigns loans that it approves a credit grade that determines payable interest rate and fees. Loans are only available to U.S. residents in 42 states and can be prepaid any time without penalty. The standard loans period is three years; five-year period is available at a higher interest rate and additional fees.

Investors can search and browse the loan listings on Lending Club website and select loans that they want to invest in based on the information supplied about the borrower, amount of loan, loan grade, and loan purpose. The loans can only be chosen at the interest rates assigned by Lending Club but investors can decide how much to fund each borrower, with the minimum investment of $25 per note.

Investors make money from interest rates, the rates vary from 6.03% to 27.49%, depending on the credit grade assigned to the loan. Lending Club makes money by charging borrowers anorigination fee and investors a service fee. The size of the origination fee depends on the credit grade and ranges from 1.1-5% of the loan amount. The size of the service fee is 1% on all amounts the borrower pays.

After the notes are issued, Lending Club loans become the obligations of Lending Club, and not of the ultimate borrower: Lending Club promises to pay the noteholder monies it receives from the borrower less its service fees, while the holders of Lending Club notes have the status of unsecured creditors of Lending Club. This means that there is a risk that the investor may lose all or part of the investment if Lending Club becomes insolvent or declares bankruptcy, even if the ultimate borrower continues to pay.

The investors have the ability to put notes up for sale before the notes have reached maturity. This service is offered in a partnership with FOLIOfn Investments who charges a 1% fee on note sales, making Lending Club the first peer-to-peer lending network to offer a secondary market for peer-to-peer loans. Other peer to peer lending networks have subsequently also partnered with FOLIOfn Investment to offer a secondary market.

After registering with the SEC, Lending Club stopped presenting itself as a social network and maintaining that social affinity will necessarily reduce the defaulting risk. It now presents the algorithm just as a search tool for investors to find loans of interest, using criteria such as the length of a loan term, target weighted average interest rate, borrower employment length, home ownership status, etc.

To reduce default risk, Lending Club now attempts to focus on high-credit-worthy borrowers, declining approximately 90% of the loan applications it receives and assigning higher interest rates to riskier loans and borrowers. Generally, only borrowers with FICO score of 660 or higher are approved for loans.